blog Buying a Home

Last Updated on April 30, 2021

If you’re looking into buying a new home, you may be asking yourself what is gross debt, and how to calculate your gross debt. Gross debt is the total amount of debt you have from all sources. Your gross debt would include mortgage, vehicle financing, credit card debt, and any other loans or debts to your name. If you’re buying a home, it’s important you understand more about what gross debt is because if it’s too high, you may not qualify to purchase a home. Read on to learn how to calculate your gross debt service and gross income, how to calculate how much you can spend on a mortgage and what to do if your gross debt service ratio is too high.

How Do I Calculate Gross Debt Service?

You can calculate your gross debt by adding your total housing costs. Housing costs are often described as principal, interest, taxes, and insurance (this is often referred to as PITI), heating and any condo fees and site or ground rent.

A general rule banks and lenders would advise is called the 35/42 rule. This rule is that members of a household should spend a maximum of 35% of their gross monthly income on housing expenses and the household’s total debt should not exceed 42% off gross monthly income.

What is the Gross Debt Service Formula?

Principal + Interest + Taxes + Heat / Gross Annual Income

Debt Service Ratios: CMHC restricts debt service ratios to 35%

Principal and Interest: Payments should be based on the applicable amortization period and loan amount, including the CMHC premium.

Taxes: Include the property tax amount.

Condo Fees and Site or Ground Rent: If applicable, 50% of the condominium fees must be included in the Gross Debt Service calculation. For chattel or leasehold loans, 100% of site or ground rent must be included.

Heat Costs: Mortgage professionals are expected to ask the prospective borrower what the monthly heating costs are for the subject property and use the actual heat cost records, if provided by the prospective borrower. Where no history is readily available, the heat costs used must be a reasonable estimate taking into consideration factors such as property size, location and/or type of heating system. Such estimates are to be based on a sound rationale, providing an accurate estimate that is reflective of the characteristics of the property being purchased.

How Do I Calculate Gross Monthly Income?

Gross monthly income is the amount of income your household earns before any taxes or deductions are removed. If you’re a household that makes gross $120,000 a year, that means your gross monthly income is $10,000. With this income, your housing costs should not exceed $3,500 a month, and your other debt payments should not exceed $700 a month. $3,500 a month in housing costs is the 35% housing spend, and $700 is the other 7% to get to the 35/42 rule.

How Do I Figure Out How Much I Can Spend?

Calculating how much you can spend on a mortgage payment can be a daunting task if you’re not aware of your gross debts. Determining your gross monthly income and your gross debt is the first step to buying a new home. When you know your gross monthly income and gross debt, you will be able to figure out how much you can spend on housing costs and what you can expect to get for a mortgage loan. 

What Can I Do If My Gross Debt Service (GDS) Ratio Is Too High?

You can decrease your debt but increasing your down-payment or finding a less expensive home. You can also find ways to increase your income. Getting a second or third job may not feel like an ideal solution but the benefits of homeownership increase over time. As principle is paid down, homeownership costs decrease even further for owners. In other words, the hard work your putting in today will set yourself up to work less later in life.

Another option is to have your home produce extra income through an income suite. Income properties like a legal basement, garage and garden suite are adding hundreds of dollars in income to home buyers’ GDS equations. Canadian Mortgage Housing Corporation will count 100% of this income. Not only can income properties help you get the home you want today if you apply the extra income towards your mortgage you can end up owning your home years earlier.

Talk to a financial advisor about how to calculate your gross debt service and how to get the best mortgage you can!

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